[0:00:58] MF: Welcome to another episode of the InvestFourMore real estate podcast. I have an awesome guest today, he also does a podcast, a very popular podcast. With me is Joe Fairless who does the Best Real Estate Investing Advice Every Podcast. I was lucky enough to be on it a while back but he has an awesome podcast, has been a real estate investor in the corporate world and done an amazing amount of deals in a short amount of time.
Joe, great to have you on the show, how are you doing?
[0:01:29] JF: Hey, thanks a lot Mark, I appreciate it, I am doing very well and looking forward to our conversation.
[0:01:35] MF: Great, yeah, thanks for being on the show, we’ll talk about your podcast, what you’re doing now investing wise but you made an interesting transaction, you were the youngest vice-president at an ad agency, if I’m right? Is that correct?
[0:01:50] JF: Yup, that’s right. I climbed the corporate ladder relatively quickly, I started out in 2005 as a junior project manager then I climbed the corporate ladder all the way to become the youngest vice president of an award winning advertising agency in New York City for my 30th birthday, and then got the entrepreneurial bug and started my real estate investing company.
[0:02:14] MF: Very cool. What attracted you to real estate from the corporate world?
[0:02:20] JF: Well I would say, whenever I was in advertising, I didn’t, at least starting out, I didn’t have any money. I was making less than minimum wage whenever you factored in all the hours I was working. Plus I had student debt as well. I didn’t have money to invest and I didn’t even know what investing was all about. I read the book Investing for Dummies and they talked about three different types of investing: stocks bonds, LLC’s and real estate. Then I went to, or I read Rich Dad, Poor Dad and it was eye opening as it is for most people.
At that point I started, I wanted to invest in real estate but I didn’t have any money and this is a couple of years after now that I graduated. So I started saving up money and then in 2009, October of 2009, I finally purchased my first house and it wasn’t because I had some crystal ball and saw that was a perfect time to purchase in the Dallas area, Dallas Texas area, even though I was living in New York City. I just didn’t have any money to buy before and then if I did then I would have been buying before then and I would have gotten in some financial trouble if that was the case.
But fortunately the timing was perfect, I bought in October of 2009 and I had been investing in single family homes while I had my advertising job and then in addition to that, I was teaching other people in New York City how to do what I was doing because I had a lot of friends who are like, “Well how are you working in advertising but buying all these homes?” I talked — I ended up buying four homes, I have three now, sold one because it was an ugly duckling but I had four at the time and they were really curious about it. So I taught a class in New York City teaching others how to do it.
And then as I kept buying more and more, I got one house in October of 2009 that I got another house in 2011 and then the third and fourth came the next year. It kept coming faster and faster because I bought them more creatively as I kept progressing. So through those experiences, I realized that real estate was something I wanted to continue to pursue. I just evolved the model so that I was buying multiple homes now at once in apartment communities versus buying single family homes, one at a time.
[0:05:05] MF: Very cool. I’m curious, that’s interesting how you became one of the youngest vice presidents ever at that institution but you still didn’t make very good money. I know at the corporate world we’re taught to do exactly what you did, climb the ladder, get as high up as you can. But I’m guessing you’re probably much better financially off now than you were working at that ad agency just because you’re your own boss, you make your own decisions and you’re doing your own thing, is that right?
[0:05:32] JF: Yeah, I would say just to clarify, I was making nothing when I first started out in 2005. But once I was climbing the corporate ladder and once I became higher up and in particular when I was the youngest vice president, my base salary was $150,000 not including the bonus. So I was making over, you know, more than six figures or in the six figures I guess and I was using that money to save and put into real estate and the thing is, one of the keys to what I’ve done on occasion, I kept my living expenses the same over the course of those nine years that I had been in advertising.
I lived in the same apartment, well I lived in one apartment the first year I lived in New York City. That was in east [inaudible, Brooklyn. It was statistically the busiest police precinct in all the five boroughs in New York City, so it was incredibly dangerous. Then I moved out of that and I moved to the east village, which is a really nice area in Manhattan but I was living in an apartment the size of a shoe box, almost literally.
I kept that apartment with a roommate, different roommates came and went but I stayed and I kept my living expenses the same, besides rent increases over time which it really didn’t increase much. Whenever I rented it in 2006, it was I want to say about $1,750 and we split it, me and my roommate, and then whenever I left in 2015 it was 2,200. Over time it didn’t increase significantly although some of us might think that is a significant increase. For New York City it really isn’t.
Other than that all my other expenses were the same. My friends would make fun of me, they’d be like “Why are you living like a collage kid, my refrigerator was a dorm style refrigerator for nine years. It’s about half the size of a normal sized human being or a quarter of the size and I just kept tucking away my money and that allowed me one to invest in properties but then two, it allowed me to have about $50,000 to then venture out on my own and start my own company and kind of create something from scratch.
[0:08:08] MF: That’s awesome. I know when I start out, I had a ’91 ford mustang and that was my daily driver for about 10 years. Even though it looks like we’re super successful and have always had money, you don’t get there by spending all your money on anything possible. I imagine a lot of your friends were making fun of you for living there, probably didn’t invest their money and they spent most of it on New York City.
[0:08:32] JF: Yup, that is correct.
[0:08:35] MF: Yeah, I’m sure it’s easy to do there and that brings me another question I have is I know a lot of people in New York, in San Francisco, in LA who want to start investing in real estate but they can’t cash flow because prices are just so crazy in those areas. I imagine that’s why you invested in Dallas. Did you do a lot of research to look at different markets? Did you have connections in Dallas? How did you choose that area?
[0:09:01] JF: I’m originally from Texas, I’m originally from the Dallas Fort Worth area. I would say that we — we meaning my sister and I. My sister’s a real estate agent in Fort Worth and she introduced me to real estate investing, she’s the one who sent me the [inaudible]. But we talked about it and since I was from Fort Worth, the Dallas Fort Worth area, whenever she sent me deals, I would know not only the rent and purchase price and all that, I would know how good of a school district it was because I knew the school’s mascot, that’s how well I know Dallas Fort Worth. And it just made a lot of sense for me to invest there because I was so familiar with it.
I’d like to say that I did this exhaustive analysis on all the different markets across, I didn’t, I knew the area in Dallas Fort Worth, I saw that there were cash flowing the properties and I decide to invest there. Now as far as if I currently, let’s say if one of your listeners lives in California and you’re looking for cash flowing the properties, at that point, if you don’t know of — well the first thing I would do is I would focus on the markets that you do know. Then qualify or disqualify them based on certain factors that you find those important.
Some of the factors I find most important is first and foremost jobs. Jobs and then job diversity. So making sure that all the employment isn’t being driven by one industry like Houston in the 1980’s. Like midland Texas, like Detroit forever, until recently. Make sure that that’s not the case and make sure there’s a lot of diversity.
And I live in Cincinnati now, I lived in New York City for 10 years after I graduated college from 2005 to 2015 but recently I moved to Cincinnati because I have an apartment community here and then also I see a lot of opportunity and then lastly, but most importantly my girlfriend’s here. But the girlfriend aside, Cincinnati has a very diverse employment base. You’ve got nine fortune 500 companies that are headquartered in Cincinnati. When you have something like that happening in your city then slow and steady wins the race and you’re not going to get a lot of ups and downs. You might get some explosive growth through a company growing but it’s such a diverse economy that you’re going to have a very stable property, assuming that it’s managed the correct way in terms of evaluation.
That’s what I would look at if I were out of state and those are the types of questions I would ask myself whenever I’m doing that research.
[0:12:01] MF: Right. I advise people too, if they have family or connections in certain areas of the country to look there first just because it’s so nice to have someone on the ground, someone local who can visually see properties for you, recommend professionals to use, things like that. Like you said, to do an exhaustive search of the entire country for the best rental markets would take forever.
It would be really hard to measure what’s good and bad without knowing the local area. Some of these companies like Realty Track will publish the best rental markets but they don’t take into consideration taxes and all kinds of different factors that make a huge difference. So no, that makes a lot of sense. I’m curious, how did you choose Cincinnati for apartments?
[0:12:49] JF: I was actually focused on Tulsa Oklahoma but for various reasons, primarily the prices the sellers were offering were outrageous for what they actually were worth. I looked at other markets and I hadn’t honed in on Cincinnati until I came across this opportunity and then once I saw the opportunity it’s 168 units, which is the first syndicated deal I did.
Once I qualified the opportunity, or I found the opportunity, then I qualified the market and that’s some of the research I did, what I mentioned earlier about job diversity and supply, demand and employment growth as well as population growth.
[0:13:33] MF: Nice, very nice. You went from single family rentals to big multi-unit properties. How did that transition work and what made you want to go towards the multi-family properties?
[0:13:46] JF: The transition was eye opening. I’d say — so I went from single family homes to apartment communities and there is a steep learning curve when you look at evaluating one house and then you look at evaluating an apartment community. Not only is there a steep learning curve but there is also a different mentality that you must have. You must have, as a apartment community owner, a business mentality. Whereas with single family, I think it’s darn good to have a business mentality but you can get away with not approaching it as much as a business if you have good property managing company in placed.
What I mean by that is from a time commitment, I spend three minutes a month on the three homes I own and that’s only to review the statements that I received from the property management company because things are smooth sailing. Whereas my apartment community, if I spent three minutes a month then it would be Armageddon. It’s important to have weekly calls with your property management company. I’m the asset manager so I don’t manage the in and out of tenants and approvals and that sort of thing, maintenance. But what I do is I oversee the budget, I oversee the financials, I oversee the progress of them implementing the business model that we have in place.
That would be the major transitional piece that was eye opening for me. Because I didn’t realize that at the beginning, I should have, but I didn’t and that’s one of the lessons I learned. As far as how did that transition take place well, I was in advertising in November of 2012, I sent an email to my family and I said, “I came, I conquered and now I don’t care about advertising anymore and I’m leaving the beginning of the year.” I’d been studying multifamily properties for a couple of months and I felt like I was ready to get going.
There were some things that happened in between like failed startup, I didn’t quite know that I was going to do multifamily syndication, in fact that was going to be a career consultant. But once I spent 3,000 bucks on a website in a developer and designer, I realized that I had no clients and that college students and young professionals don’t have the money in marketing and advertising, don’t have the money to pay for a consultant for their career or they don’t want to. That was a very quick crash and burn as my first startup venture.
But as I was talking to friends of mine, more and more of them said, “Well, if you ever do something larger than a single family homes, let me know, I’m looking to, you know, I might be interested in investing in them.” And I heard that more and more. I was like, “Wait a second, do I actually have customers before I have a product?” Whereas on my career consulting thing, I had a product before I had customers.
That’s another thing I learned, it’s really simple but I have a product before you have customers or excuse me, have customers before you have a product. And so what I did is I heard that more and more, “I’d be really interested if you did something bigger,” so I just started looking and I looking. That’s when I was looking at Tulsa Oklahoma for about a month and a half, things didn’t work out so I moved to another market and that’s whenever I found the property in Cincinnati.
One of the challenges, another challenge. This is an external — the first challenge I mentioned was an internal challenge but the external challenge that I didn’t expect is for my single family home credibility to not be squat. They don’t care about my single family home experience. In fact, it’s almost a disadvantage because they look at me as though I’m just a single family home buyer, which at the time it was. That’s where the importance of surrounding myself with people who are successfully doing it and can successfully help me do it on my own or with them, that’s where that comes into play.
So specifically if someone’s looking to do multifamily syndication then one recommendation I have for them is to surround yourself with the right team members and I’ll get specific. Specifically a property manage a company because what the property management company does is not only are they your eyes and ears locally and it’s especially helpful if you’re not local, but two and more importantly and to the point of credibility, they add tons of credibility in the eyes of the seller and the mortgage broker, your real estate broker. When you tell them that you’re working with such and such property Management Company, you get instant credibility because that property management company has credibility in the market if you’re working with a good one.
Another team member is a mentor. If it’s not someone that you pay then find someone who you don’t pay but you give them a lot of value or they’re a family friend. The challenge I’ve had going that approach where you don’t pay someone or you don’t have some sort of agreement where you’re giving them service of some kind then family friends, it tends to be not as immediate as needed to get the deal done because questions are coming up, they’re flying at you left and right whenever you’re in the middle of a deal.
I’d say, those are the two keys, and then obviously you got to have your CPA, your attorney and that whole crew but two of the most important would be the property management company and the mentor. I had both, that helped me align myself with, or that helped me impress the seller to a point where we ended up getting the deal done.
[0:19:49] MF: That’s very cool. I interviewed Michael Blank a couple of weeks ago, I don’t know if you’re familiar with him, but he does the same type of thing, syndication large multifamily deals and he flipped houses before he got in to the multifamily and he said the exact same thing about credibility.
He’s like, “I would go to these guys and say, “Hey I flipped 30 houses, I’m experienced real estate investor,” and he said they’d look at them like, “So what? You didn’t flip multifamily properties, you have no idea what you’re talking about.” And he couldn’t believe the backlash he got from people for not ever doing a multifamily deal. So interesting to know that.
[0:20:25] JF: Yup. Yeah it’s definitely the case and I’m a friend of Michael’s as well and he’s been on my show and I’ve been on his. So yeah he’s definitely in the space too and getting the same type of feedback whenever he was starting out.
[0:20:46] MF: Yeah, it’s kind of like a good old boys club where if you’re not a multifamily investor already then it’s really hard to break into but that’s great advice with having a mentor, property management company to show people that, “Hey, I’m serious, I’ve done my homework, I’m not just some guy with dreams and no idea what I’m getting into.”
[0:21:05] JF: Right.
[0:21:07] MF: Very cool. How long do you think it took you from the time you first decided, “I’m going to buy multifamily,” to the day you actually closed on that first property?
[0:21:18] JF: Nine months.
[0:21:21] MF: So it wasn’t a quick process then, it took a while? What were your, besides lining up the people and getting people to trust you, what was your biggest challenge during that whole process of lining up that property?
[0:21:36] JF: Well, it’s just in nine months that also we’ve got to take into account the experience I had investing for four years. So I’d been investing in single family home, and again, we’ve talked about how the experience doesn’t translate, externally doesn’t translate from a perception standpoint and the difference.
But there are some fundamentals that can be applied from single family to multifamily like just focusing on cash flow as well as seeing where the, making sure you have equity in a property when you buy it, making sure that you know what it will cost to be moved and ready or in the apartment community’s case and deferred maintenance, that sort of thing. As far as the — sorry, what was your question?
[0:22:36] MF: Just the biggest challenges, which I think…
[0:22:38] JF: Biggest challenges, sorry. Now I will fully answer. [Laughter] I’d say the biggest challenge was, it’s all about finding the money and the deal. There were challenges in both of those; finding the deals took me — looking back on it, it was relatively short amount of time but it certainly in that time period whenever I didn’t have a paycheck coming in, it seemed like a long time, even though it was about February to April, three months. It took me three months to find the deal.
As far as putting the money together, that’s a challenge too because I’d never raised a penny before in my life. The challenge I had, specifically, was I need to raise at the time I thought it was 400 but it ended up being $1.3 million total for the deal and what I ended up doing is just being very resourceful, crying in the corner a little bit, weeping myself to — cry myself to sleep every night, not really but I felt like it sometimes. One tactical thing that I recommend for everybody out there is whenever you’re raising money, create an Excel white paper spreadsheet and in that spreadsheet, write down everyone’s name that you know. Then in the next column, so that’s one column, their name.
The next column, write down the way you know them. So is it through church, is it through college, is it through high school, is it through your work? Then in the next column, low range and in the next column write high range. What the goal is, is to get one person from each of those groups of networks to say, “Yes I’m interested, I’d like to learn more,” then name check that person, assuming they’re cool with that, name check that person to someone else in that network because it’s much more likely to be successful if somebody goes into it knowing that other people they know who are responsible with their money are also going into it. That’s one tactical thing I’d give for advice for your listeners.
[0:25:00] MF: That’s awesome, yeah. It’s the group mentality, if someone else you know is doing it then it’s not nearly as scary to go into it and if something happens or something fails then hey, I’m not the only one who did it. No, that’s great. I’m curious too, when you do these syndications, these are pretty large deals you’re doing. How many different investors do you have going into these deals for one deal?
[0:25:26] JF: It depends but so let’s see. For my first deal there were 12 investors, I done two, I’ve done 168 and then I just closed on a 250 unit in Houston. For that one we have in total 44 investors and we raised over three million dollars. It just kind of depends on the investment for the next one, it depends on the raise and the different investors who are involved in it.
[0:26:02] MF: Wow, that’s a lot to manage, I’m curious to know, when you have these investors, are they getting percentage of the profits or are they just getting an equity share, how are they setup to make money on their investment?
[0:26:15] JF: It’s usually, while I say that every investment is different but the standard way that I’ve structured it so far is they received a preferred return, usually it’s about 8% preferred return. And preferred return is a promised to pay them first after a portion of the cash flow based on whatever they invested and then above and beyond preferred return they will be some sort of performance hurdle based on the returns.
Say, it would be a 50/50 split after the 8% and then once they reach a 20% internal rate of return at that point it would be 70/30. That’d be 70 then 30 just to align our interest to show that they’re getting their 20% internal rate return and then there will be performance hurdles for after that. They get a kind of a conservative play with their preferred return and then they get the up side in performance.
[0:27:33] MF: Very nice. No, that’s very interesting how that’s setup and imagine that would be very appealing to many investors, especially when they’re used to the stock market without any preferred returns obviously or a CD with no returns. Okay, very cool. On these property, I mean these are big apartment buildings, are you buying properties that are in pretty decent shape with rents where they should be or these properties that are distressed a little bit? Maybe under rented and properties you can go through and really increase the value by increasing the income on them?
[0:28:07] JF: Yeah. My business model has evolved, but one thing’s remained the same and that is that there needs to be upside potential in the deal. What we’re doing now is we’re buying B class properties that have a value add component to them, we’re putting in say $5,000 a unit, then we’re increasing rents 75 bucks a unit, making it above 20% return on that money and then selling in about five years once you’ve got that stabilized and you’ve realized the up side.
So that’s what we’re doing on the last deal we closed on. On the first one, we actually got it creatively through a master lease with option to purchase agreement and that allowed us to take control of the property and work on the property while we have control over it and the principle pay down on the mortgage, we’re getting the equity on that. So basically we receive all the rent and all the income but we make all the expense payments and we pay them mortgage.
We have an exercise to option that purchase whenever we want, well up until four years and that coincides with when the loan matures on the mortgage. The reason why we did a master lease versus putting new financing on it is because there was about a million dollar payment penalty when we took it over. We didn’t’ want to trigger that, it just didn’t make any financial sense or deal wouldn’t have happened. So that was one of the things that we did creatively to get to get the deal first place and it’s worked out really well for us.
[0:29:52] MF: Very nice, very cool. You got two pretty giant apartment complexes, what are your goals for the future? Are you going to keep trying to buy more and more and then slowly sell them off when five years comes up? Are you going to try and hold some? What are your goals for the future?
[0:30:08] JF: The goal is to control a billion dollars’ worth of property before my 40th birthday and I’m 33 years old. Right now I control $21 million, I don’t know what percent of the way I am there but I’ve got some work to do. That’s the goal, a lot of it is going to be buy and hold over the long run and that’s kind of the approach I’m going to take.
[0:30:38] MF: Very cool, are you trying to reach that goal by just buying bigger and bigger projects are you just trying to buy more and more of them?
[0:30:45] JF: Yeah, it’s going to be bigger and bigger. I do want to clarify when I say “buy and hold” and I kind of cut it off short just because I had to sneeze. I turned my microphone off for all the listeners. Now that I’ve sneezed, what I can say is, with the buy and hold, usually we hold for about five years and then we sell, that’s the plan.
So what we’re working on now is yeah, we are actually making offers on larger properties than 250 units. It’s never going to be smaller than 150, it’s just not worth our time quite frankly. It’s just not, the similar amount of effort is required to put a deal together that’s 100 compared to 300 or 400 or even 500. It’s just different types of inspection reports, but as far as structurally, logistically on the kind of the financing and getting the money raised and all that, its’ pretty darn similar.
So We’re looking at larger stuff and one of the regrets that most people have who are in multifamily if you ask them after they buy their first property, they’ll say when their number one regret is that they didn’t buy larger and that’s not going to be a regret of mine because I started out with 168 units, but that is one regret. We’ll continue to grow by buying larger and larger properties and once you reach a certain point of say 500 or 600 then you’re going to need to either stay there or buy a portfolios of two or three apartment communities and grouping them together.
[0:32:25] MF: Very cool. Are you seeing it harder to buy properties as the market improves or in different areas with different class buildings or are you still seeing decent deals out there?
[0:32:39] JF: There’s always going to be good deals out there, it’s just a matter of uncovering them and having, through the right relationships or mark and or marketing tactics. We’ve got direct mail going on, we have broker relationships which are incredibly strong, primarily due to my business partner who has most of those relationships. I’ve got some but he has been in the industry a lot longer than I have.
And through my podcast too, I get a lot of opportunities through my podcast. It’s a daily podcast and I have been approached, we haven’t closed anything yet but we’re looking at a couple of things pretty seriously. There is all sorts of — when you put yourself out there and you’re in there long enough and you’re doing it consistently on a daily basis, opportunities just tend to come up.
[0:33:36] MF: Nice, and speaking of your podcast, like I said, I’ve been on it and you have had 500 episodes I think on your podcast so far? That’s incredible.
[0:33:47] JF: Closing in on it. Yeah, I don’t know when this episode’s airing but we’ll likely be right around 500 whenever it does.
[0:33:59] MF: So what made you want to start a podcast about real estate investing? What got that into your head?
[0:34:04] JF: It was actually my life coach and business coach through the Tony Robbins program, he told me about podcasts. I had no experience with podcasts but I wanted to continue to get my brand out, my name out there and then learn also. But primarily at the beginning it was just to get my information out there.
Now, I look at it and it’s less about getting my information out there, it’s more about learning and connecting with others. I mean, we wouldn’t be having this conversation if I didn’t have my podcast because we wouldn’t know each other most likely, we wouldn’t know each other. It’s just a great way and I’ve also raised almost $300,000 from people who have reached out to me about opportunities that I have. And through sponsors I make money on a monthly basis, it’s an incredible business tool.
[0:35:01] MF: No, that’s been awesome and yeah my podcast has been successful as well and it was something I was a little scared to do because you’re putting yourself out there when you’re interviewing people and talking like this. But no, it’s been a really fun experience and it’s just a great way to reach people. I still think it’s amazing you do that many episodes and you have one every day, right?
[0:35:22] JF: Yup, one releases every day, it’s been doing that for over a year and a half.
[0:35:27] MF: Well, that is awesome. So great, well I think that is all the questions I have for you. I guess I have one more question that is, if someone’s just starting out a multifamily, they want to kind of follow your path or start investing in some larger units through a syndication. What’s the first thing or what’s the best piece of advice you can give to those people?
[0:35:47] JF: If they’re just starting out and they want to get into deal syndication?
[0:35:52] MF: Yeah, or just buying multi-unit properties, whether it’s through syndication or other mean, what’s the best way for them to get started?
[0:36:02] JF: Just you got to know the fundamentals. I would listen to podcasts and read books and then reach out to those who are being interviewed and who are writing those books. One of the books that I like is The Complete Guide to Buying and Selling Apartments by Steve Berges — B-e-r-g-e-s — and another one by Dolf de Roos, Commercial Real Estate Investing, which isn’t apartment specific but it’s pretty — it has some really creative ideas for how to maximize income on an apartment community as well as other commercial buildings like cellphone towers and helicopter pads and all sorts of crazy stuff. But I’d say, if you’re starting out then educate yourself and you can do that through those methods that I mentioned.
[0:36:54] MF: Right, don’t expect it to happen overnight, it takes time obviously.
[0:36:59] JF: That is true. Yes, yes, yes.
[0:37:01] MF: Very cool. Alright, yeah, again it’s the Best Real Estate Investing Advice Every Podcast and then you have a blog as well, JoeFairless.com. And that’s j-o-e-f-a-i-r-l-e-s-s.com. Going to your blog, is that the best way to reach out to you to talk to you or is there a better way?
[0:37:22] JF: Yeah, that’s fine. You can also email me at [email protected]
[0:37:30] MF: Very cool. Well Joe, I appreciate you being on the show, lot of great information, you’ve done an incredible amount of things in a short period of time so kudos to you for being so aggressive and I love your billion dollar goal, that’s awesome. I haven’t heard that one yet. So congratulations, I wish you the best of luck of getting there.
[0:37:51] JF: Alright, well thank you so much and I’m really grateful to have this conversation and looking forward to staying in touch and thanks a lot every one.
[0:37:58] MF: Alright, no problem and I’ll have a link to your blog and to your podcast in the article for this episode. Yup, thanks a lot and we’ll talk soon.
[0:38:05] JF: Alright, bye.